Data and Research August 24, 2018

A Combination of Changes Can Improve an Individual’s Retirement Outlook

For both the general public and mass-affluent households, saving more, choosing to invest one’s savings, delaying retirement and lowering standard-of-living expectations have a far greater effect on one’s retirement outlook than asset allocation, reducing fees or achieving alpha, Morningstar found.

Reported by

Noting that nearly half of Americans have nothing saved for retirement and the median 401(k) balance is less than $10,000, Morningstar set out in a new report, “Easing the Retirement Crisis,” to figure out how people can better position themselves for a successful retirement.

Morningstar analyzed eight changes people can make to build a more secure financial future. These fall into three categories: financial planning (adjusting one’s standard of living in retirement, delaying retirement and increasing contribution rates), investing (increasing net returns from investing and using a more aggressive asset allocation) and investor behavior (signing up for increased contributions over time, starting with a larger amount of savings and choosing whether to invest one’s savings at all.)

The analysis ran 400 million simulations in total: 3,916 households in a nationally representative sample, across 100 scenarios in which the households change contribution rates, their retirement ages, or other aspects of their financial lives, across 1,000 randomly determined market scenarios.

Morningstar found that under normal market conditions, 25.6% of the working population is likely to have what they need for a starting savings balance at retirement. Under bad market conditions, 18.5% would have what they need.

Among mass-affluent households, i.e. those with more than $100,000 in investable assets, 45.3% would have the retirement savings they need under normal market conditions. Under bad market conditions, this drops to 32.2%.

Get more!  Sign up for PLANSPONSOR newsletters.

For both the general public and mass-affluent households, saving more, choosing to invest one’s savings, delaying retirement and lowering standard-of-living expectations have a far greater effect on one’s retirement outlook than asset allocation, reducing fees or achieving alpha.

For each individual action, extreme changes, like a 20% increase in contributions, are needed to move a household into a comfortable financial place. However, if less extreme changes are combined, they can be quite effective.

For example, if Americans delayed retirement until at least age 67 and contributed at least 6%, the percentage of households having what they need would jump from 25.6% to 71.2%. For mass-affluent households, these two changes would boost their retirement readiness from 45.3% to 72.9%.

Morningstar notes that what works varies by household; therefore, personalized advice is important.

More about Morningstar’s research is here.
Data and Research August 24, 2018

Cash Balance Plans Particularly Appealing to Small Businesses

Kravitz research found that 92% of cash balance plans are in firms with fewer than 100 employees.

Reported by

There has been a 15% increase in the number of new cash balance plans and a 30% rise in employer contributions, according to Kravitz, Inc.

There were 20,452 active cash balance plans in 2016, the most recent year for which Internal Revenue Service (IRS) reporting data is available.

Growth was expected to be slightly slower in 2016 due to the election year uncertainty and possible changes to tax rates, but employer contributions soared 30% to $38.2 billion, from $29.3 billion in 2015, bringing total plan assets to $1.03 trillion.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

“Cash balance plans are particularly appealing to small business owners who need to catch up on delayed retirement savings,” says Dan Kravitz, head of Kravitz, Inc. “In many cases, they can double or even triple their pre-tax retirement savings. Employers also typically increase contributions to employee accounts 50% or more when adding a cash balance plan, and that’s a vital competitive edge in a very tight labor market.”

The research also found that 92% of cash balance plans are in firms with fewer than 100 employees. Fifty-seven percent have 10 or fewer employees. The average employer contribution to retirement accounts in companies with both a cash balance plan and a 401(k) is 6.9%, versus 4.7% in firms with just a 401(k).

IRS regulations allowing broader investment options in cash balance plans have accelerated growth in new plans. The “actual rate of return” option and other investment choices the IRS approved in 2010 and 2014 made these plans more flexible and removed certain funding issues. The number of plans using the actual rate of return is 39%, up from just 10% five years ago.

«